If you have a dismal credit score, and you plan to apply for loan for a new house or car, you probably are doing whatever you can to bring your numbers up. You're paying your bills on time. You've been studying your credit reports and contacting the bureaus if you find any incorrect information. Maybe you've even taken out another small loan, just to show lenders that, yes, you've got this.But you may not have this. Not yet, anyway. A high credit score doesn't guarantee a loan. If you are planning on applying for a loan, keep the following in mind.[See: 12 Simple Ways to Raise Your Credit Score.]Your credit history has more to do with getting a loan than your credit score. According to Fair Isaac Corporation, which created the credit scoring algorithm that most lenders use when making lending decisions, excellent credit is when your score is 720 or more. Good credit would be 690 to 719. Fair credit is 630 to 689. Bad credit generally includes scores from 300 to 629.Credit scores and reports do tend to go hand in hand. If you have a high credit score, you probably have a positive credit report. But not always. You may have been a financial disaster up until a few years ago when you completely turned things around, and ever since, have watched your credit score climb.And while a few years of good financial behavior may be enough to get you a loan, lenders may nevertheless be scared by your past.[See: 10 Easy Ways to Pay Off Debt.]"Ultimately, the approval process is different for each applicant and lender," says Carla Blair-Gamblian, a consultant at Veterans United Home Loans, a mortgage brokerage in Columbia, Missouri.And whoever is looking over your loan may not be really looking at your credit history; instead he or she may be using a software program to make the decision."Many lenders use an automated system from Fannie Mae or Freddie Mac to get an approval status, so even if you have a great credit score but had really poor credit in the past, you may not still be able to get a mortgage loan," says Jeremy David Schachter, a mortgage advisor at Pinnacle Capital Mortgage Corporation in Phoenix, Arizona.If you do get approved for a loan, it's then that the credit score kicks in and becomes relevant, according to Schachter."Whatever your credit score is at the time of the application is what's determined for the interest rates," he says.Some items look bad on a credit report; others, don't look as bad. This won't shock you, but the longer you take to make a payment, the worse your credit report looks in the eyes of a lender. If your debt winds up in court, or you have a bankruptcy in your past, or a lien on your home, that could definitely derail your attempt to get a loan.But if you have a lot of late bills in your past, but you always managed to get them paid within 90 days, a lender typically won't be too horrified by that.David Hosterman, a branch manager with Castle & Cooke Mortgage LLC in Greenwood Village, Colorado, says many financing companies have specific guidelines when it comes to "derogatory credit items," and often the guidelines are tied to a specific time."For instance when it comes to home loans, in regards to an FHA loan, [lenders] typically require that a customer is two years discharged from a bankruptcy before obtaining new credit," Hosterman says. "For conventional loans – Fannie Mae and Freddie Mac – they typically require a four-year waiting period."Hosterman adds that these are just guidelines, and if a customer can prove that a bankruptcy was due to extenuating circumstances, like being laid off from work, you might have a better shot of getting a loan with some lenders.[See: How to Live on $13,000 a Year.]Other factors can come into play when it comes to your loan's terms. If you get an approval, and you have that high credit score, you're almost certainly going to get a loan with good terms. But you may not get the best terms possible.When it comes to a mortgage, "interest rates are based on many different factors," says Schachter, adding that several of those factors include your credit score, what kind of property you're buying and how much your down payment will be.If you are denied a loan. You can always apply for another loan with someone else. You have probably heard that applying for multiple loans can make a credit score drop, just what you don't need, but according to MyFico.com, Fair Isaac Corporation's website, if you apply for multiple mortgage, auto or student loans within a 30-day period, your score won't be affected. The company recognizes that you're shopping for a loan, and that it isn't as if you're going to wind up with three car loans and two mortgages. If you apply for multiple credit cards, however, that could drop your score.If you keep getting turned down, however, then at some point you'll need to bow to reality and put off applying for a loan. Fortunately, time heals all financial wounds – eventually. For instance, a bankruptcy will be removed from your credit report, typically after seven years, if it's a Chapter 13 bankruptcy. A Chapter 7 bankruptcy will be removed after 10 years.So you may have to bide your time while you wait for another year or two to go by, and your credit report and its history becomes less worrisome to lenders. The good news is that as long as you keep doing what you're supposed to be doing, and paying off your debts and staying on top of your finances, your credit score will likely keep going up. When you are eventually approved for a loan, the terms you get will probably be even better than they would have been had you received your money today.12 Habits to Help You Take Control of Your Credit.
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How a New Law Will Let You Freeze Your Credit Files for Free
Credit freezes help prevent thieves from opening new lines of credit in another person's name, but most states allow credit bureaus to charge a fee for the service. That will change this autumn.The Economic Growth, Regulatory Relief and Consumer Protection Act, signed on May 24, will let Americans freeze their credit files for free. "It's a small step in the right direction," says Jeff Taylor, co-founder and managing director of Digital Risk, a technology services company that works with the mortgage industry. Eliminating fees will make this security tool more accessible, but consumers also need to be aware that a credit freeze is not a cure-all for identity theft.Here's what you need to know about credit freezes, the new law and whether a freeze is right for you.[See: 10 Ways to Protect Yourself From Online Fraud.]How a credit freeze works. The three major credit bureaus – Equifax, Experian and TransUnion – are required by state laws to provide a method to freeze credit. Also known as a security freeze, a credit freeze restricts access to a credit file.That means a new creditor can't retrieve or review your credit report if you've frozen it. In theory, this should prevent any new lines of credit from being opened in your name. Those who have been victims of identity theft or who know their personal information was accessed in a security breach are often encouraged to use a credit freeze to ensure their data isn't used to open new accounts. Anyone who freezes their credit file will have to request the credit bureaus unfreeze it if they wish to apply for a loan or other credit line themselves.In many states, the credit bureaus are allowed to charge a fee to freeze and unfreeze a credit report. While the fee is often waived for victims of identity theft, others may be required to pay anywhere from $3 to $10, depending on what their state's law allows. Consumers must initiate a freeze with each credit bureau individually, which means the total cost in some states could be as high as $30 each time they add or lift a credit freeze."It's a nominal fee," says Victor Powell, a certified financial planner with financial firm Tanglewood Total Wealth Management in Houston, "but it can definitely add up, especially if you have a number of people in the house."What you need to know about the credit freeze changes. The need to pay for credit freezes will end this year. Plus, the new legislation will make changes to banking laws regarding mortgages and credit, among other things. It also requires credit bureaus to provide free credit freezes to consumers. The provision will go into effect 120 days after the bill's signing, which will be likely be in mid-September."This new law … will help consumers by improving the economy and assisting in the fight against identity theft," says Francis Creighton, president and CEO of the Consumer Data Industry Association, a trade group that includes 100 corporate members including credit bureaus and mortgage reporting companies.[Read: How Consumers Can Protect Their Online Privacy Right Now.]In addition to providing free credit freezes for adults, the law allows parents to freeze the credit of their minor children as well. Doing so prevents someone from opening an account using a child's name and Social Security number without the parent's permission or knowledge. Currently, credit freezes can be requested either over the phone or online, and there is no indication that will change after the provisions of the new law go into effect.How the new law will impact consumers. Credit freezes can be a useful tool, but consumers need to be aware of their limitations. For instance, a freeze should eliminate the possibility of a scammer opening a new line of credit, but it won't prevent someone who has access to an existing account from using it. A credit freeze also won't prevent tax identity theft in which someone files a fraudulent tax return in another person's name.Creighton says consumers can take additional steps beyond a credit freeze to protect themselves. "People should make sure they are checking their bills for erroneous activity," he says. "They should check their credit reports every year to make sure there are no errors."Another thing to consider before placing a credit freeze on an account is whether you'll be making a major purchase in the near future. This may be particularly important for those in the market for a new home."We have the tightest [housing] inventory we've had in a couple decades," Taylor says. Homebuyers who need to quickly get preapproval for a property in a competitive market could find the process of unfreezing credit to be cumbersome. "It could slow down the speed at which you can proceed." Each credit bureau provides a phone number as well as a web form that can be used to make a freeze request. Consumers who want all three bureaus to freeze their file must contact all three companies separately. Once their identifying information is verified and the freeze is enacted, a PIN number will be issued. Since each credit bureau issues its own PIN, consumers may have three numbers to store. To unfreeze a credit file, the correct PIN must be provided to the issuing bureau. If that number has been lost, the process of unfreezing a report can be further delayed. "It's not that big of a deal," Powell says, "but it's one more thing to keep track of."Remember: A lock is not a freeze. Credit bureaus like Equifax offer services that lock an account, and these locks may be more quickly removed than a freeze. "A lock and a freeze have the same impact on your Equifax credit report, but they aren't the same thing," says Jerry Grasso, a spokesperson for Equifax Global Consumer Solutions. Locks don't require a PIN and typically may be managed via a mobile app, but they also aren't regulated by the government in the same way as freezes are monitored.Locks are offered directly from credit bureaus to consumers and may be bundled with credit monitoring and fraud alert services. Currently, the TrueIdentity service from TransUnion and Lock & Alert service from Equifax are offered free of charge. However, there is no law requiring they remain free, as is the case with credit freezes. The third major credit bureau, Experian, has a CreditWorks program that includes a lock and $1 million of identity theft insurance for $4.99 for the first month and $24.99 for each following month.[See: 9 Financial Tools You Should Be Using.]Despite the convenience of lock programs, Powell still says people can't go wrong with a credit freeze. They're available at no cost starting this fall and with government regulations behind them, "it's the best bang for your buck," he says..